<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission file number 1-13626
HORIZON HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
(Address of principal executive offices, including zip code)
(972) 420-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the registrant's Common Stock, $0.01 par
value, as of June 30, 2000, is 6,308,953.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS....................................................................... 3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of May 31, 2000 (unaudited)
and August 31, 1999............................................................................ 3
Consolidated Statements of Operations for the three months ended
May 31, 2000 and May 31, 1999 (each unaudited)................................................. 5
Consolidated Statements of Operations for the nine months ended
May 31, 2000 and May 31, 1999 (each unaudited)................................................. 6
Consolidated Statements of Cash Flows for the nine months ended
May 31, 2000 and May 31, 1999 (each unaudited)................................................. 7
Notes to Consolidated Financial Statements (unaudited)......................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................................... 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 5,567,020 $ 5,438,510
Accounts receivable less allowance for uncollectible
accounts of $3,128,105 at May 31, 2000 and
$2,980,849 at August 31, 1999 12,884,348 12,885,399
Prepaid expenses and supplies 532,234 842,701
Other receivables 147,220 200,394
Other current assets 378,386 459,256
Income taxes receivable 134,683 363,920
Current deferred taxes 2,449,322 2,485,296
------------ ------------
TOTAL CURRENT ASSETS 22,093,213 22,675,476
------------ ------------
PROPERTY AND EQUIPMENT:
Equipment 6,281,853 7,028,809
Building improvements 492,426 454,902
------------ ------------
6,774,279 7,483,711
Less accumulated depreciation 4,050,879 4,192,437
------------ ------------
2,723,400 3,291,274
Goodwill, net of accumulated amortization of $5,466,870
at May 31, 2000, and $4,389,113 at August 31, 1999 51,931,733 53,036,992
Contracts, net of accumulated amortization of $7,007,032
at May 31, 2000, and $5,749,991 at August 31, 1999 5,770,733 7,027,775
Other assets 383,979 504,228
------------ ------------
TOTAL ASSETS $ 82,903,058 $ 86,535,745
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,010,377 $ 1,254,577
Employee compensation and benefits 6,835,629 6,929,722
Medical claims payable 3,734,095 4,558,823
Accrued expenses 5,824,613 5,977,704
Note payable 2,813 35,706
Current portion of long term debt 3,520,000 3,338,000
------------ ------------
TOTAL CURRENT LIABILITIES 20,927,527 22,094,532
Other noncurrent liabilities 566,450 355,191
Long-term debt, net of current portion (Note 4) 12,280,000 16,662,000
Deferred income taxes 1,397,770 1,618,169
------------ ------------
TOTAL LIABILITIES 35,171,747 40,729,892
------------ ------------
Commitments and contingencies (Note 5) -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 500,000 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 7,267,750 shares issued and 6,308,953 shares
outstanding at May 31, 2000 and 7,267,750 shares
issued and 6,664,428 shares outstanding at August 31, 1999 72,678 72,678
Additional paid-in capital 18,005,305 18,641,228
Retained earnings 36,854,045 31,506,116
Treasury stock, at cost (958,797 shares at May 31,
2000 and 603,322 shares at August 31, 1999) (Note 6) (7,200,717) (4,414,169)
------------ ------------
47,731,311 45,805,853
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 82,903,058 $ 86,535,745
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 23,436,595 $ 24,526,051
Premiums and fees 8,375,966 11,713,000
Other 578,429 161,636
------------ ------------
Total revenues 32,390,990 36,400,687
Expenses:
Salaries and benefits 17,852,047 19,118,917
Medical claims 3,143,301 4,697,193
Purchased services 2,966,560 3,544,142
Provision for (recovery of) bad debts (75,578) 559,730
Depreciation and amortization 1,207,320 1,124,206
Other 4,037,326 4,228,665
------------ ------------
Total operating expenses 29,130,976 33,272,853
------------ ------------
Operating income 3,260,014 3,127,834
Other income (expense):
Interest expense (302,336) (341,793)
Interest and other income 93,471 55,007
------------ ------------
Income before income taxes 3,051,149 2,841,048
Income tax expense 1,226,638 1,130,634
------------ ------------
Net income $ 1,824,511 $ 1,710,414
============ ============
Earnings per common share:
Basic $ .29 $ .25
============ ============
Diluted $ .28 $ .24
============ ============
Weighted average shares outstanding:
Basic 6,295,120 6,810,529
============ ============
Diluted 6,501,666 7,120,857
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 69,936,193 $ 73,048,746
Premiums and fees 30,155,866 35,290,790
Other 1,149,802 554,356
------------ ------------
Total revenues 101,241,861 108,893,892
Expenses:
Salaries and benefits 54,229,232 56,725,786
Medical claims 11,295,061 15,980,789
Purchased services 9,387,285 10,534,140
Provision for bad debts 799,220 215,157
Depreciation and amortization 3,589,742 3,309,951
Other 12,226,509 12,730,552
------------ ------------
Total operating expenses 91,527,049 99,496,375
------------ ------------
Operating income 9,714,812 9,397,517
Other income (expense):
Interest expense (946,421) (1,114,668)
Interest and other income 280,319 199,506
Gain (loss) on disposal of fixed assets (100,201) 800
------------ ------------
Income before income taxes 8,948,509 8,483,155
Income tax expense 3,600,580 3,367,344
------------ ------------
Net income $ 5,347,929 $ 5,115,811
============ ============
Earnings per common share:
Basic $ .84 $ .74
============ ============
Diluted $ .81 $ .71
============ ============
Weighted average shares outstanding:
Basic 6,386,801 6,914,448
============ ============
Diluted 6,641,149 7,249,825
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net income $ 5,347,929 $ 5,115,811
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,589,742 3,309,951
Deferred income taxes (220,399) 135,985
Loss (gain) on disposal of fixed assets 100,201 (800)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 1,052 (1,913,862)
Decrease (increase) in other receivables 80,674 (6,674)
Decrease in income taxes receivables 229,237 220,251
Decrease (increase) in prepaid expenses and supplies 310,467 (526,363)
Decrease (increase) in other assets 237,093 (539,998)
(Decrease) in accounts payable, employee compensation and
benefits, medical claims payable, and accrued expenses (1,204,183) (293,579)
Increase in other liabilities 211,259 75,178
------------ ------------
Net cash provided by operating activities 8,683,072 5,575,900
------------ ------------
Investing activities:
Purchase of property and fixed assets (787,919) (385,863)
Proceeds from sale of fixed assets 650 3,300
Payment for purchase of ChoiceHealth, Inc., net of cash acquired -- (1,847,390)
Proceeds from purchase price adjustment of FPM Behavioral Health, Inc. -- 1,222,193
Payment for purchase of Resources in Employee Assistance and
Corporate Health, Inc., net of cash acquired -- (1,936,352)
------------ ------------
Net cash used in investing activities (787,269) (2,944,112)
------------ ------------
Financing Activities:
Payments on long term debt (4,232,893) (19,020,417)
Proceeds from long term borrowings -- 14,500,000
Net proceeds from issuance of common stock -- 102,252
Tax benefit related to stock options exercise 186,835 881,592
Cash used in purchase of treasury stock (3,363,138) (4,462,159)
Cash provided by issuance of treasury stock -- 470,111
Cash used in stock option exercise (358,097) --
------------ ------------
Net cash used in financing activities (7,767,293) (7,528,621)
------------ ------------
Net increase (decrease) in cash and short term investments 128,510 (4,896,833)
Cash and short-term investments at beginning period 5,438,510 6,204,297
------------ ------------
Cash and short-term investments at end of period $ 5,567,020 $ 1,307,464
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 965,544 $ 1,104,841
============ ============
Income taxes $ 3,368,933 $ 2,678,164
============ ============
Supplemental disclosure on non-cash investing activities
Payment for ChoiceHealth:
Fair value of assets acquired $ -- $ 3,594,732
------------ ------------
Cash paid -- (2,000,000)
------------ ------------
Liabilities assumed $ -- $ 1,594,732
============ ============
Payment for Resources in Employee Assistance and Corporate Health, Inc.:
Fair value of assets acquired $ -- $ 2,434,311
------------ ------------
Cash paid -- (2,000,000)
------------ ------------
Liabilities assumed $ -- $ 434,311
============ ============
Proceeds from purchase price adjustment of FPM Behavioral Health, Inc.
Adjustment to fair value of assets acquired $ -- $ (1,073,710)
Cash received -- 1,222,193
------------ ------------
Liabilities assumed $ -- $ 148,483
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Horizon Health Corporation (the "Company" or "Horizon") is a provider of
employee assistance programs ("EAP") and mental health services to
businesses and managed care organizations as well as a contract manager
of clinical and related services, primarily of mental health and physical
rehabilitation programs, offered by general acute care hospitals in the
United States. The management contracts are generally for initial terms
ranging from three to five years, the majority of which have automatic
renewal provisions. The Company currently has offices in the Dallas,
Texas; Los Angeles, California; Chicago, Illinois; Tampa, Florida;
Denver, Colorado; Orlando, Florida; and Philadelphia, Pennsylvania
metropolitan areas. The Company's National Support Center is in
Lewisville, Texas.
Information regarding the Company's recent acquisitions are included in
Note 3 hereof.
BASIS OF PRESENTATION:
The accompanying consolidated balance sheet at May 31, 2000, the
consolidated statements of operations for the three and nine months ended
May 31, 2000 and 1999, and the consolidated statements of cash flows for
the nine months ended May 31, 2000 and 1999 are unaudited. These
financial statements should be read in conjunction with the Company's
audited financial statements for the year ended August 31, 1999. In the
opinion of Company management, the unaudited consolidated financial
statements include all adjustments, consisting only of normal recurring
accruals, which the Company considers necessary for a fair presentation
of the financial position of the Company as of May 31, 2000, and the
results of operations for the three and nine months ended May 31, 2000
and 1999.
Operating results for the three and nine month periods are not
necessarily indicative of the results that may be expected for a full
year or portions thereof.
2. EARNINGS PER SHARE
Earnings per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128").
Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if the Company's stock options were
exercised. Such potential dilutive common shares are calculated using the
treasury stock method.
The following is a reconciliation of the numerators and the denominators
of the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
2000 1999
---------------------------------------- ----------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED MAY 31,
Basic EPS ......................... $1,824,511 6,295,120 $ .29 $1,710,414 6,810,529 $ .25
---------- ----------
Effect of Dilutive Securities
Options ......................... 206,546 310,328
---------- ----------
Diluted EPS ....................... $1,824,511 6,501,666 $ .28 $1,710,414 7,120,857 $ .24
========== ========== ========== ========== ========== ==========
FOR THE NINE MONTHS ENDED MAY 31,
Basic EPS ......................... $5,347,929 6,386,801 $ .84 $5,115,811 6,914,448 $ .74
---------- ----------
Effect of Dilutive Securities
Options ......................... 254,348 335,377
---------- ----------
Diluted EPS ....................... $5,347,929 6,641,149 $ .81 $5,115,811 7,249,825 $ .71
========== ========== ========== ========== ========== ==========
</TABLE>
8
<PAGE> 9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During fiscal year 2000 and 1999, certain shares subject to options to
acquire common stock were not included in certain computations of EPS
because the options exercise price was greater than the average market
price of the common shares for the quarter. The computation for the
quarter ended May 31, 1999 excluded 138,816 shares subject to options,
with exercise prices ranging from $7.42 to $23.75. The computation for
the quarter ended May 31, 2000 excluded 775,337 shares subject to
options, with exercise prices ranging from $6.91 to $23.75. The
computation for the nine months ended May 31, 1999 excluded an average of
334,601 shares subject to options, with exercise prices ranging from
$7.42 to $23.75. The computation for the nine months ended May 31, 2000
excluded an average of 574,953 shares subject to options, with exercise
prices ranging from $6.91 to $23.75.
3. ACQUISITIONS
REACH
Effective April 1, 1999, the Company acquired all of the outstanding
capital stock of Resources in Employee Assistance and Corporate Health,
Inc. ("REACH") of Murray Hill, New Jersey, and REACH has been
consolidated with the Company as of April 1, 1999. The Company accounted
for the acquisition of REACH by the purchase method. REACH provides
employee assistance programs and other related behavioral health care
services to self-insured employers. REACH had total revenues of
approximately $1.4 million (unaudited) for the ten months ending March
31, 1999. The purchase price of approximately $2.0 million in cash was
funded by a $2.0 million advance under the Company's existing term loan
credit facility. The allocation of the purchase price exceeded the fair
value of REACH's tangible net assets by $2,326,846, of which $2,054,791
is recorded as goodwill and $272,055 as service contracts. Tangible
assets acquired and liabilities assumed totaled $150,496 and $477,342,
respectively.
CHOICEHEALTH, INC.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado, and ChoiceHealth has been consolidated with the Company as of
October 5, 1998. The Company accounted for the acquisition of
ChoiceHealth by the purchase method. ChoiceHealth provides managed
behavioral health care services, employee assistance programs and other
related behavioral health care services to health maintenance
organizations and self-insured employers. ChoiceHealth had total revenues
of approximately $7.6 million (unaudited) for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash
was funded by a $2.0 million advance under the Company's existing term
loan credit facility. The allocation of the purchase price exceeded the
fair value of ChoiceHealth's tangible net assets by $3,086,936, of which
$2,907,927 is recorded as goodwill and $179,009 as service contracts.
Tangible assets acquired and liabilities assumed totaled $809,848 and
$1,877,069, respectively.
4. LONG-TERM DEBT
At May 31, 2000 and August 31, 1999, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
------------ ------------
<S> <C> <C>
Term Loan Facility $ 15,800,000 $ 20,000,000
Revolving Credit Facility -- --
------------ ------------
15,800,000 20,000,000
Less current maturities 3,520,000 3,338,000
------------ ------------
$ 12,280,000 $ 16,662,000
============ ============
</TABLE>
9
<PAGE> 10
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Chase Bank of Texas, National Association, as
Agent, for itself and other lenders party to the Credit Agreement for a
senior secured credit facility in an aggregate amount of up to $50.0
million (the "Credit Facility"). The Credit Facility consists of a $10.0
million revolving credit facility to fund ongoing working capital
requirements and an initial $40.0 million term loan facility to refinance
certain existing debt and to finance future acquisitions by the Company.
As of May 31, 2000, the Company had borrowings of $15.8 million
outstanding against the term loan facility against which it can no longer
draw, and $10.0 million available under the revolving credit facility.
The credit facility bears interest at (1) the Base Rate plus the Base
Rate Margin, as defined, or (2) the LIBOR Rate plus the LIBOR Margin, as
defined. At May 31, 2000, the interest rate on outstanding indebtedness
under the credit facility was 7.62%. The Base Rate Margin and LIBOR
Margin vary depending on the debt coverage ratio of the Company. The
revolving credit facility matures on November 30, 2000. The advance term
loan facility requires quarterly payments of principal of $880,000 which
begun February 29, 2000 and continue through maturity on November 30,
2002.
5. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental payments
under these leases, which expire at various dates:
<TABLE>
<S> <C>
Three months ending August 31, 2000 $ 462,146
For the year ending August 31, 2001 1,542,983
For the year ending August 31, 2002 1,001,199
For the year ending August 31, 2003 671,974
For the years ending August 31, 2004 and thereafter 409,471
----------
$4,087,773
==========
</TABLE>
Rent expense for the nine months ended May 31, 2000 and 1999 totaled
$1,989,403 and $1,674,651 respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in Lewisville, Texas. In connection with this
lease transaction, the Company guaranteed a loan of approximately
$900,000 by a financial institution to the building owner. The Company
also agreed to purchase the leased building for approximately $4.5
million at the end of the lease term in September 2001, if it is not sold
to a third party, or the Company does not extend its lease. The Company's
current intention is to extend the lease.
The Company is insured for professional and general liability on a
claims-made policy, with additional tail coverage being obtained when
necessary. Management is unaware of any claims against the Company that
would cause the final expenses for professional and general liability to
vary materially from amounts provided.
The Company is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the
opinion of management that the ultimate disposition of such litigation,
net of any applicable insurance, would not be significantly in excess of
any reserves or have a material adverse effect on the Company's financial
position or results of operations.
10
<PAGE> 11
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. STOCK REPURCHASES
On September 21, 1998, the Board of Directors of the Company authorized
the repurchase of up to 1,000,000 shares of its common stock and on
November 19, 1999 authorized the repurchase of an additional 200,000
shares of its common stock. The stock repurchase plan authorized the
Company to make purchases of its outstanding common stock from time to
time in the open market or through privately negotiated transactions,
depending on market conditions and applicable securities regulations. The
repurchased shares were added to the treasury shares of the Company and
may be used for employee stock plans and for other corporate purposes.
The shares were repurchased utilizing available cash and borrowings under
the Company's credit facility. The Company repurchased 1,189,300 shares
of its common stock as of November 30, 1999, which completed the stock
repurchase plan. In accordance with certain provisions of its current
term loan facility agreement, no further purchases can be made. As of May
31, 2000, 230,503 shares have been reissued in conjunction with the
exercise of certain stock options.
11
<PAGE> 12
7. SEGMENT INFORMATION
The following schedule represents revenues and operating results for the
three months and nine months ended May 31, 2000 and May 31, 1999 by
operating subsidiary:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
Services Management Management Outcomes Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED:
MAY 31, 2000
Revenues $ 8,632,914 $ 20,429,171 $ 2,943,084 $ 319,994 $ 65,827 $ -- $ 32,390,990
Inter Company Revenues 18,583 -- -- 351,494 -- (370,077) --
Earnings before
interest,
taxes, depreciation
and
Amortization (EBITDA) 552,095 5,061,490 438,156 28,729 (1,613,136) -- 4,467,334
Total Assets 42,077,357 63,324,410 5,862,995 340,388 26,490,193 (55,192,285) 82,903,058
MAY 31, 1999
Revenues $ 11,661,734 $ 21,882,151 $ 2,746,990 $ 68,296 $ 41,516 $ -- $ 36,400,687
Inter Company Revenue 28,174 -- -- 460,322 -- (488,496) --
Earnings before
interest,
Taxes, depreciation,
and
Amortization (EBITDA) 921,386 5,066,903 534,997 (70,323) (2,200,923) -- 4,252,040
Total Assets 45,107,893 56,593,100 4,664,383 415,887 27,907,950 (48,324,044) 86,365,169
</TABLE>
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon
Horizon Mental Specialty Mental
Behavioral Health Rehab Health Intercompany
Services Management Management Outcomes Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED:
MAY 31, 2000
Revenues $ 30,456,181 $ 61,160,187 $ 8,600,252 $ 848,325 $ 176,916 $ -- $101,241,861
Inter Company Revenues 54,877 -- -- 1,099,656 -- (1,154,533) --
Earnings before
interest,
taxes, depreciation
and
amortization (EBITDA) 3,039,356 15,540,616 1,162,843 5,295 (6,443,556) -- 13,304,554
Total Assets 42,077,357 63,324,410 5,862,995 340,388 26,490,193 (55,192,285) 82,903,058
MAY 31, 1999
Revenues $ 35,067,372 $ 65,829,586 $ 7,555,000 $ 304,456 $ 137,478 $ -- $108,893,892
Inter Company Revenue 47,937 -- -- 1,317,321 -- (1,365,258) --
Earnings before
interest,
taxes, depreciation,
and
amortization (EBITDA) 2,204,632 15,424,698 584,873 166,247 (5,672,982) -- 12,707,468
Total Assets 45,107,893 56,593,100 4,664,383 415,887 27,907,950 (48,324,044) 86,365,169
</TABLE>
(A) Horizon Behavioral Services provides managed behavioral care and employee
assistance programs.
(B) Horizon Mental Health Management provides mental health contract
management services to general acute care hospitals.
(C) Specialty Rehab Management provides physical rehabilitation contract
management services to general acute care hospitals.
(D) Mental Health Outcomes provides outcome measurement information regarding
the effectiveness of mental health treatment programs and data base
services.
(E) "Other" represents the Company's corporate offices and National Support
Center located in Lewisville, Texas which provides management, financial,
human resource, and information system support for the Company and its
subsidiaries.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a provider of employee assistance plans ("EAP") and
behavioral health services to businesses and managed care organizations, as well
as a leading contract manager of psychiatric and physical rehabilitation
clinical programs offered by general acute care hospitals in the United States.
The Company has grown both internally and through acquisitions, increasing both
the variety of its treatment programs and services and the number of its
management contracts. Over the last seven years, the Company has increased its
management contracts from 43 to a total of 145 as of May 31, 2000 and currently
has contract locations in 34 states. Of its management contracts, 120 relate to
mental health treatment programs and 25 relate to physical rehabilitation
programs. The Company has also developed a proprietary mental health outcomes
measurement system known as CQI+. At May 31, 2000, the Company provided outcome
measurement services as well as data services under 115 contracts.
Through its subsidiary Horizon Behavioral Services, Inc., at May 31,
2000, the Company had 263 contracts to provide EAP and managed behavioral health
services covering over 1.7 million lives. The Company offers an array of managed
care products to corporate clients, self-funded employer groups, commercial HMO
and PPO plans, government agencies, and third party payors. Revenues are derived
from EAP services, administrative only services, and at risk managed behavioral
health services.
During the quarter the Company continued experiencing the effects of
the termination of six significant managed care contracts, one of which occurred
in the quarter ended November 30, 1999, three terminated during the quarter
ending February 29, 2000, and one terminated during the quarter ended May 31,
2000. The six significant contracts provided annual revenues of approximately
$15 million, or about 11% of the company's total annual revenues. One of the six
contract terminations arose from a client insolvency, which resulted in a
$288,000 charge to bad debt during the three months ended November 30, 1999.
Five of the six terminations, the "applicable contracts", impacted the results
of the three months ended May 31, 2000. The effects of the sixth termination
will occur gradually, with membership being transitioned away over the course of
the next year. Because of the timing of the actual termination dates, the full
financial impact of the terminations will not be realized until the next fiscal
year. The Company has initiated a number of expense reduction measures to
mitigate the financial impact of these terminations. One of the expense
reduction measures included closing five of the company's nine clinic locations
during the quarter ended May 31, 2000.
The fees received by the Company for its services under management
contracts are paid directly by its client hospitals. The client hospitals
receive reimbursement under either the Medicare or Medicaid programs or payments
from insurers, self-funded benefit plans or other third-party payors for the
mental health and physical rehabilitation services provided to patients of the
programs managed by the Company. As a result, the availability and amount of
such reimbursement impacts the decisions of general acute care hospitals
regarding whether to offer mental health and physical rehabilitation services
pursuant to management contracts with the Company.
Amendments to the Medicare regulations in 1997 as part of the Balanced
Budget Act, established maximum reimbursement amounts on a per case basis for
both inpatient mental health and physical rehabilitation services. In some
cases, the reimbursement limitations have resulted in decreased amounts
reimbursed to the Company's client hospitals and have led to the renegotiation
of a lower contract management fee structure for the Company. In other cases the
reimbursement limitations have resulted in the termination or non-renewal of the
management contract.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services and
implementation of the outpatient prospective payment system (PPS) effective
August 1, 2000. Thereafter, reimbursement for partial hospitalization will
utilize a fixed reimbursement amount per patient day. The proposed reimbursement
rate per patient day is a wage-adjusted rate from a base of $202.19, which will
lower Medicare reimbursement levels to many hospitals for partial
hospitalization services. In an effort to lessen the potentially significant
decrease in reimbursement, recently enacted legislation allows some hospitals to
receive transitional relief effective August 1, 2000 which will be phased out
over three years. However, the general decrease in reimbursement has, in some
cases, led to the renegotiation of a lower contract management fee structure for
the Company and in other cases has resulted in the termination or non-renewal of
the management contract.
13
<PAGE> 14
Revenues from partial hospitalization services were $4.0 million, or
17.1% of total contract management revenues for the quarter ended May 31, 2000,
and were $11.8 million, or 16.9% of total contract management revenues for the
nine months ended May 31, 2000. Of the 145 management contracts at May 31, 2000,
92 contracts or 63.4% of the contracts include partial hospitalization services.
Of the 92 partial contracts, 75 program locations were in operation and had a
partial hospitalization program in operation, 17 program locations were in
operation but the partial hospitalization programs were not yet in operation,
and 6 program locations were not yet in operation for any of the programs. The
termination of all partial hospitalization contracts, while unlikely and not
expected, would reduce operating income by $4.4 million or more annually.
Recent amendments to the Medicare statutes provides for a linear
phase-out of cost-based reimbursement of physical rehabilitation services over a
three-year period, the start of which was previously delayed and has been
rescheduled for cost reporting periods beginning on or after April 1, 2001. The
resulting phase-in of reimbursement for physical rehabilitation services based
on PPS could significantly lower Medicare reimbursements to hospitals and could
adversely effect the business operations and financial results of the Company.
Regulations specifying the rules and amounts of reimbursement have not as yet
been released.
A number of the Company's client hospitals and managed care customers
are experiencing cash flow problems, increasing the Company's exposure to bad
debts. The Company's general policy is to reserve for accounts receivable
balances greater than 90 days outstanding. The Company is being more vigorous in
its collection efforts. As a result, bad debt expense in the quarter reflects a
net recovery of $76,000, and for the fiscal year to date bad debt expense is
$800,000. The ending reserve for bad debt is $3.1 million or 19.5% of accounts
receivable.
Information regarding the Company's recent acquisitions are included in
Note 3 of the Notes to Consolidated Financial Statements (unaudited).
14
<PAGE> 15
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 29, NOVEMBER 30, AUGUST 31, AUGUST 31, AUGUST 31,
2000 2000 1999 1999 1998 1997
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EAP AND MENTAL HEALTH SERVICES
Covered Lives 1,767,850 1,974,637 2,308,588 2,402,167 1,894,015 288,519
CONTRACT MANAGEMENT
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 134 140 141 147 161 181
Contract locations signed and unopened 11 12 10 6 11 14
---------- ---------- ---------- ---------- ---------- ----------
Total contract locations 145 152 151 153 172 195
========== ========== ========== ========== ========== ==========
SERVICES COVERED BY CONTRACTS IN
OPERATION:
Inpatient 126 129 128 133 149 166
Partial Hospitalization 75 81 81 86 102 104
Outpatient 26 26 26 27 32 24
Home health 8 8 8 7 10 17
CQI + and data systems (under 115 114 110 106 82 86
contract)
TYPES OF TREATMENT PROGRAMS IN
OPERATION:
Geropsychiatric 154 164 158 165 189 197
Adult psychiatric 46 45 50 54 67 75
Substance abuse 3 3 4 4 8 10
Physical Rehabilitation 25 25 25 25 20 20
Other 7 7 6 5 9 9
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended May 31, 2000
and 1999, the percentage relationship to total revenues of certain costs,
expenses and income.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MAY 31, ENDED MAY 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 72.4% 67.4% 69.1% 67.1%
Premiums and fees 25.9 32.2 29.8 32.4
Other 1.7 0.4 1.1 0.5
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
Operating revenues
Salaries and benefits 55.1 52.5 53.6 52.1
Medical claims 9.7 13.0 11.2 14.7
Purchased services 9.2 9.7 9.3 9.7
Provision for (recovery of) bad debts (0.3) 1.5 0.7 0.2
Depreciation and amortization 3.7 3.1 3.5 3.0
Other 12.5 11.6 12.1 11.7
-------- -------- -------- --------
Total operating expenses 89.9 91.4 90.4 91.4
-------- -------- -------- --------
Operating income 10.1 8.6 9.6 8.6
-------- -------- -------- --------
Interest and other income (expenses), net (0.7) (0.8) (0.7) (0.8)
-------- -------- -------- --------
Income before taxes 9.4 7.8 8.9 7.8
Income tax expense 3.8 3.1 3.6 3.1
-------- -------- -------- --------
Net income 5.6% 4.7% 5.3% 4.7%
======== ======== ======== ========
</TABLE>
15
<PAGE> 16
THREE MONTHS ENDED MAY 31, 2000 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1999
Revenue. Revenues for the three months ended May 31, 2000 were $32.4
million representing a decrease of $4.0 million or 11.0%, as compared to
revenues of $36.4 million for the corresponding period in the prior fiscal year.
Contract management revenue decreased $2.4 million, or 9.8%, due to a decline in
the average number of contract locations in operation from 155.5 for the three
months ended May 31, 1999, to 136.6 for the three months ended May 31, 2000.
However, same store sales for contract management revenues, that is contracts in
operation for both the entire quarters ended May 31, 1999 and May 31, 2000
increased $1.3 million or 7.1%. Premiums and fees decreased $3.3 million
primarily as a result of the termination of the five applicable managed care
contracts, as discussed previously, whose revenues in the three months ended May
31, 2000 were $230,000 versus $3.5 million for the same period in the prior
fiscal year. The decreases in contract management revenues and premiums and fees
were partially offset by an increase in other revenue of $400,000 as a result of
increased revenues from outcomes measurement and data base services.
Salaries and Benefits. Salaries and benefits for the three months ended
May 31, 2000 were $17.9 million representing a decrease of $1.2 million, or
6.3%, as compared to salaries and benefits of $19.1 million for the three months
ended May 31, 1999. Average full time equivalents for the three months ended May
31, 2000 were 1,166 representing a decrease of 133, or 10.2%, as compared to
average full time equivalents of 1,299 for the three months ended May 31, 1999.
This decrease is a result of cost control initiatives taken by the Company in
response to the reduction in revenues. Salary and benefit cost per full time
equivalent for the three months ended May 31, 2000, were $15,315 representing an
increase of $595, or 4.0%, per full time equivalent as compared to salary and
benefits costs of $14,720 per full time equivalent for the three months ended
May 31, 1999.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended May 31, 2000 were $1.2 million representing an
increase of $100,000, or 9.1%, as compared to depreciation and amortization
expenses of $1.1 million for the corresponding period in the prior fiscal year.
An increase of $8,000 is due to the amortization of goodwill and contract
valuations resulting from the acquisition of REACH. The remaining increase
results from the depreciation expense of additional equipment purchased by the
Company, in particular, furniture, equipment and leasehold improvements
resulting from the move of the EAP division offices to Blue Bell, PA in October
1999.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for the three months
ended May 31, 2000 were $10.1 million, representing a decrease of $2.9 million
or 22.3%, as compared to other operating expenses of $13.0 million for the
corresponding period in the prior fiscal year. The following components identify
the primary variances between the periods reported.
Medical claims expense for the three months ended May 31, 2000 was $3.1
million, representing a decrease of $1.6 million or 34.0%, as compared to
medical claims expense of $4.7 million for the corresponding period in the prior
fiscal year. This is primarily the result of the termination of the five
applicable managed care contracts discussed previously, as well as improved
utilization management and review of patients seeking authorization for
treatment. The improved utilization management resulted in a decrease in
inpatient cost, attained primarily by directing patient care toward lower cost
inpatient facilities and the use of outpatient options. Inpatient days per year
per one thousand members decreased from an average of 20.4 for the three months
ended May 31, 1999 to 16.3 for the three months ended May 31, 2000.
Purchased services for the three months ended May 31, 2000 were $3.0
million, representing a decrease of $600,000 or 16.7%, as compared to purchased
services of $3.6 million for the corresponding period in the prior fiscal year.
Medical director fees decreased $272,000 for the three months ended May 31,
2000, as compared to the corresponding period in the prior fiscal year. This
decrease is a result of the decrease in the average number of contract locations
in operation as discussed above as well as the expense controls initiated by the
Company. Also, fees paid to temporary physicians decreased $126,000 due to the
recruitment of permanent physicians at certain contract locations. In addition,
legal fees and ancillary service expense decreased $81,000 and $77,000,
respectively, for the three months ended May 31, 2000, as compared to the
corresponding period in the prior fiscal year.
Bad debt expense was a net recovery of $76,000 for the three months
ended May 31, 2000, as compared to expense of $560,000 for the three months
ended May 31, 1999, a decrease of $635,000. The decrease is primarily
attributable to collections from contract locations that were previously
reserved as bad debt. The Company is continuing to vigorously pursue collections
in an effort to minimize bad debt expense.
16
<PAGE> 17
Other operating expense was $4.0 million for the three months ended May
31, 2000, representing a decrease of $200,000 or 4.8%, as compared to other
operating expense of $4.2 million for the corresponding period in the prior
fiscal year. Rent expense increased $200,000 due to a one-time charge related to
the closing of the five clinic locations as discussed previously. The remaining
decrease of $400,000 is a result of certain Company initiated expense reduction
measures, which significantly decreased various expense categories, including
recruiting expenses, express mail cost and telephone expense.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended May 31, 2000 was a net
expense of $211,000, as compared to $287,000 for the corresponding period in the
prior fiscal year. This change results from a decrease in interest expense of
approximately $39,000 related to a reduction in the average outstanding credit
facility balances between the periods, net of higher interest rates on such
borrowings, and an increase in interest income of approximately $37,000 due to
higher average cash balances.
Income Tax Expense. For the three-month period ended May 31, 2000, the
Company recorded federal and state income taxes of $1.2 million resulting in a
combined tax rate of 40.2%. For the three-month period ended May 31, 1999, the
Company recorded federal and state income taxes of $1.1 million resulting in a
combined tax rate of 39.7%.
NINE MONTHS ENDED MAY 31, 2000 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1999
Revenue. Revenues for the nine months ended May 31, 2000 were $101.2
million representing a decrease of $7.7 million or 7.0%, as compared to revenues
of $108.9 million for the corresponding period in the prior fiscal year.
Contract management revenue decreased $4.2 million, or 5.8%, due to a decline in
the average number of contract locations in operation from 156.4 for the nine
months ended May 31, 1999, to 140.3 for the nine months ended May 31, 2000. The
decrease of $4.2 million, or 5.8% was offset by an increase in same store sales,
that is management contracts in operation for both the entire periods ended May
31, 1999 and May 31, 2000, of $1.1 million or 2.2%. Premiums and fees decreased
$5.1 million primarily as a result of the termination of the five applicable
managed care contracts, as discussed previously, whose revenues in the nine
months ended May 31, 2000 were $5.7 million versus $10.0 million for the same
period in the prior fiscal year. The decreases in contract management and
premiums and fees were partially offset by an increase in other revenue of
$600,000 to $1.1 million for the nine months ended May 31, 2000. This increase
is primarily the result of increased revenues from outcomes measurement and data
base services.
Salaries and Benefits. Salaries and benefits for the nine months ended
May 31, 2000 were $54.2 million representing a decrease of $2.5 million, or
4.4%, as compared to salaries and benefits of $56.7 million for the nine months
ended May 31, 1999. Average full time equivalents for the nine months ended May
31, 2000 were 1,203 representing a decrease of 87, or 6.7%, as compared to
average full time equivalents of 1,290 for the nine months ended May 31, 1999.
This decrease is a result of cost control initiatives taken by the Company in
response to the reduction in revenues. Salary and benefit cost per full time
equivalent for the nine months ended May 31, 2000, were $45,068 representing an
increase of $1,097, or 2.5%, per full time equivalent as compared to salary and
benefits costs of $43,971 per full time equivalent for the nine months ended May
31, 1999.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended May 31, 2000 were $3.6 million representing an
increase of $300,000, or 9.1%, as compared to depreciation and amortization
expenses of $3.3 million for the corresponding periods in the prior fiscal year.
An increase of $53,000 is due to the amortization of goodwill and contract
valuations resulting from the acquisition of REACH. The remaining increase
results from the depreciation expense of additional equipment from acquisitions
or purchases by the Company, including purchases of furniture, equipment and
leasehold improvements resulting from the EAP division move to Blue Bell, PA in
October 1999.
Other Operating Expenses (Including Medical Claims, Purchased Services
and Provision for Bad Debts). Other operating expenses for the nine months ended
May 31, 2000 were $33.7 million, representing a decrease of $5.8 million or
14.7%, as compared to other operating expenses of $39.5 million for the
corresponding period in the prior fiscal year. The following components identify
the primary variances between the periods reported.
17
<PAGE> 18
Medical claims expense for the nine months ended May 31, 2000 was $11.3
million, representing a decrease of $4.7 million or 29.4%, as compared to
medical claims expense of $16.0 million for the corresponding period in the
prior fiscal year. This is primarily the result of the termination of the five
applicable managed care contracts as discussed previously, as well as improved
utilization management and review of patients seeking authorization for
treatment. The improved utilization management resulted in a decrease in
inpatient cost, attained primarily by directing patient care toward lower cost
inpatient facilities and the use of outpatient options. Inpatient days per year
per one thousand members decreased from an average of 21.7 for the nine months
ended May 31, 1999 to 16.7 for the nine months ended May 31, 2000.
Purchased services for the nine months ended May 31, 2000 were $9.4
million, representing a decrease of $1.1 million or 10.5%, as compared to
purchased services of $10.5 million for the corresponding period in the prior
fiscal year. Medical director fees decreased $786,000 for the nine months ended
May 31, 2000, as compared to the corresponding period in the prior fiscal year.
This decrease is a result of the decrease in the average number of contract
locations in operation as discussed in the revenue section above as well as the
expense controls initiated by the Company. Also, fees paid to temporary
physicians decreased $113,000 due to the recruitment of permanent physicians at
certain contract locations.
Bad debt expense for the nine months ended May 31, 2000 was $800,000
representing an increase of $585,000 as compared to bad debt expense of $215,000
for the nine months ended May 31, 1999. Bad debt expense, excluding the recovery
of $1,750,000 related to one former Specialty Healthcare Management, Inc.
contract, was $2.0 million for the nine months ended May 31, 1999. Excluding the
$1,750,000 recovery, bad debt expense decreased $1.2 million for the nine months
ended May 31, 2000 versus May 31, 1999. A decrease of $360,000 was due to the
collection of past due amounts from five contract management locations that
terminated prior to the current fiscal year and $591,000 was due to the
collection of a payment from one contract location that was previously reserved
as bad debt. The remainder of the decrease is due to more vigorous collection
efforts.
Other operating expense for the nine months ended May 31, 2000 was
$12.2 million, representing a decrease of $500,000 or 3.9%, as compared to other
operating expense of $12.7 million for the corresponding period in the prior
fiscal year. Rent expense increased $200,000 due to a one-time charge related to
the closing of the five clinic locations, as previously discussed. The remaining
decrease of $700,000 is a result of certain Company initiated expense reduction
measures, which significantly decreased various expense categories, including
recruiting expenses, express mail cost and telephone expense.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the nine months ended May 31, 2000 was a net
expense of $768,000, as compared to $914,000 for the corresponding period in the
prior fiscal year. Interest income increased $121,000 due to a higher average
cash balances on hand during the period, and decreased $42,000 due to the
receipt of interest in February 1999 related to the post closing purchase price
adjustment for FPM Behavioral Health, Inc. Interest expense decreased $168,000
related to a reduction in the average outstanding credit facility balances
between the periods partially offset by higher interest rates. Other expense
increased $99,000 due to a loss on disposal of assets related to the write-off
of obsolete computer equipment and software.
Income Tax Expense. For the nine month period ended May 31, 2000, the
Company recorded federal and state income taxes of $3.6 million resulting in a
combined tax rate of $40.2%. For the nine month period ended May 31, 1999, the
Company recorded federal and state income taxes of $3.4 million resulting in a
combined tax rate of 39.7%.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2000, the Company had $5.6 million of cash on hand and is
required to pay $3.5 million in principal amortization over the next year and
expects to incur approximately $800,000 in capital expenditures. For the nine
months just ended, the Company had operating cash flow of $8.7 million. However,
as previously discussed, five of the six significant managed care contracts
which are terminating, terminated during the nine months ended May 31, 2000. The
six significant managed care contracts provided annual revenues of approximately
$15 million, or about 11% of the Company's total annual revenues. In response to
the loss of this revenue, the Company has initiated certain cost reduction
initiatives, which included closing five clinics in the Tampa and Jacksonville,
Florida metropolitan areas. For the nine months just ended, the Company had
$788,000 in capital expenditures related to establishing the new EAP Operations
Center near Philadelphia, PA as well as upgrading computer and network
equipment. In addition, the Company has spent
18
<PAGE> 19
approximately $175,000 over the past two years related to its Year 2000
initiatives, for which no further expenditures are anticipated.
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Chase Bank of Texas, National Association as Agent (the
"Agent") for itself and other lenders party to the Credit Agreement, for a
senior secured credit facility in an aggregate amount of up to $50.0 million
(the "Credit Facility"). The Credit Agreement consisted of a $10.0 million
revolving credit facility to fund ongoing working capital requirements (the
"Revolving Credit Facility") and an initial $40.0 million term loan facility to
refinance certain existing debt and to finance future acquisitions by the
Company (the "Term Loan Facility"). At May 31, 2000, the Term Loan Facility had
$15.8 million outstanding, against which it can no longer draw.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter
ended November 30, 1997, as filed with the Securities and Exchange Commission
(the "Commission") on December 19, 1997.
The Company is the borrower under the Credit Agreement which is
unconditionally guaranteed by all material domestic subsidiaries of the Company.
The Revolving Credit Facility terminates November 30, 2000 and the Term Loan
Facility has a term of five years, with availability no longer existent as of
November 30, 1999. Amounts outstanding under the Term Loan Facility on November
30, 1999 are to be repaid in twelve quarterly principal payments, which began
February 29, 2000, based upon a five year amortization schedule with the first
eleven principal payments being 1/20th of the outstanding balance on November
30, 1999, and the twelfth being the remaining unpaid principal balance. Based on
the November 30, 1999 term loan balance of $17.6 million, each quarterly
repayment will be $880,000. Principal outstanding under the Credit Agreement
bears interest at either the "Base Rate" (the greater of the Agent's "prime
rate" or the federal funds rate plus .5%) plus 0% to .5% (depending on the
Company's Indebtedness to EBITDA Ratio as defined in the Credit Agreement) or
the "Eurodollar Rate" plus .75% to 1.5% (depending on the Indebtedness to EBITDA
Ratio), as selected by the Company. The Company incurs quarterly commitment fees
ranging from .25% to .375% per annum (depending on the Indebtedness to EBITDA
Ratio) on the unused portion of the Revolving Credit Facility (until November
30, 2000).
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified permitted debt
or permitted liens, (ii) certain material acquisitions, other than specified
permitted acquisitions (including any single acquisition not greater than $10.0
million or cumulative acquisitions not in excess of $30.0 million during any
twelve consecutive monthly periods), (iii) certain mergers, consolidations or
asset dispositions by the Company or changes of control of the Company, (iv)
declaring, ordering or paying any sum for any dividend or other distribution,
(v) certain management vacancies at the Company, and (vi) material change in the
nature of business conducted. In addition, the terms of the Credit Facility
require the Company to satisfy certain ongoing financial covenants. The Credit
Facility is secured by a first lien or first priority security interest in
and/or pledge of substantially all of the assets of the Company and of all
present and future subsidiaries of the Company.
As of September 30, 1998, the Credit Facility was amended to allow the
Company to utilize advances, under the Term Loan Facility, to repurchase its
capital stock through November 30, 1999. As of November 30, 1999, the Company
had repurchased 1,189,300 shares of its common stock, of which 162,778 and
230,503 shares had been reissued pursuant to the exercise of certain stock
options as of November 30, 1999 and May 31, 2000 respectively. Through November
30, 1999, advances of $4.0 under the term loan had been used for stock
repurchases.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building, which had been constructed, to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial institution to the owner. The Company also agreed to
purchase the leased building for approximately $4.5 million at the end of the
lease term in September 2001 if either the building is not sold to a third party
or the Company does not extend its lease. The Company's current intention is to
extend the lease.
Recent amendments to the Medicare statutes also provide for the
elimination of cost based reimbursement of partial hospitalization services and
implementation of the outpatient prospective payment system (PPS) effective
August 1, 2000. Thereafter, reimbursement for partial hospitalization will
utilize a fixed reimbursement amount per patient day. The proposed reimbursement
rate per patient day is a wage-adjusted rate from a base of $202.19, which will
lower
19
<PAGE> 20
Medicare reimbursement levels to many hospitals for partial hospitalization
services. In an effort to lessen the potentially significant decrease in
reimbursement, recently enacted legislation allows some hospitals to receive
transitional relief effective August 1, 2000 which will be phased out over three
years. This change may adversely affect the ability of the Company to obtain
management contracts for partial hospitalization services and the amount of fees
paid to the Company under such contracts.
Revenues from partial hospitalization services were $4.0 million, or
17.1% of total contract management revenues for the quarter ended May 31, 2000,
and were $11.8 million, or 16.9% of total contract management revenues for the
nine months ended May 31, 2000. Of the 145 management contracts at May 31, 2000,
92 contracts or 63.4% of the contracts include partial hospitalization services.
Of the 92 partial contracts, 75 program locations were in operation and had a
partial hospitalization program in operation, 17 program locations were in
operation, but the partial hospitalization programs were not yet in operation,
and 6 program locations were not yet in operation for any of the programs. The
termination of all partial hospitalization contracts, while unlikely and not
expected, would reduce operating income by $4.4 million or more annually.
Effective October 5, 1998, the Company acquired all the outstanding
capital stock of ChoiceHealth for approximately $2.0 million. The acquisition
was funded by incurring debt of $2.0 million under the Term Loan Facility.
Effective April 1, 1999, the Company acquired all the outstanding
capital stock of REACH for approximately $2.0 million. The acquisition was
funded by incurring debt of $2.0 million under the Term Loan Facility.
CERTAIN ADJUSTED EARNINGS DATA
The following table sets forth for the three and nine months ended May
31, 2000 and 1999, diluted earnings per share based on net income plus
amortization expense related to goodwill, net of tax, and operating cash flow
per share based on net income plus depreciation and amortization expense, net of
tax, less capital expenditures.
<TABLE>
<CAPTION>
Three Months ended May 31, Nine Months ended May 31,
-------------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Adjusted earnings per share
(Net income plus amortization related to goodwill, net of tax) $ .32 $ .27 $ .92 $ .80
Operating cash flow per share
(Net income plus depreciation and amortization $ .43 $ .39 $ 1.23 $ 1.11
less capital expenditures)
</TABLE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Commission, press releases, conferences, or otherwise,
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation, any
statement that may predict, forecast indicate, or imply future results,
performance or achievements, and may contain the words "believe," "anticipate,"
"expect," "estimate," "project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. Such statements involve risks,
uncertainties or other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking statements. Certain risks, uncertainties and
other important factors are detailed in this report and will be detailed from
time to time in reports filed by the Company with the Commission, including
Forms 8-K, 10-Q, and 10-K, and include, among others, the following: general
economic and business conditions which are less favorable than expected;
unanticipated changes in industry trends; decreased demand by general hospitals
for the Company's services; the Company's inability to retain existing
management, EAP or managed care contracts or to obtain additional contracts;
adverse changes in reimbursement to general hospitals by Medicare or other
third-party payers for costs of providing mental health or physical
rehabilitation services; adverse changes to other regulatory provisions relating
to mental health or physical rehabilitation services; fluctuations and
difficulty in forecasting operating results; the ability of the Company to
sustain, manage or forecast its growth; heightened competition, including
specifically the intensification of price competition; the entry of new
competitors and the development of new products or services by new and existing
competitors; changes in business strategy or development plans; inability to
carry out marketing and sales plans; business disruptions; liability and other
claims asserted against the Company; loss of key
20
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executives; the ability to attract and retain qualified personnel; customer
services; adverse publicity; demographic changes; and other factors referenced
or incorporated by reference in this report and other reports or filings with
the Commission. Moreover, the Company operates in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on the Company's business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward looking statements. These
forward-looking statements represent the estimates and assumptions of management
only as of the date of this report. The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any forward
looking statement contained herein to reflect any change in its expectations
with regard thereto or any change in events, conditions or circumstances on
which any statement is based. Given these risks and uncertainties, investors
should not place undue reliance on forward looking statements as a prediction of
actual results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the end of the 1999 fiscal year, no material changes have
occurred that would affect the disclosures regarding market risk contained in
the Annual Report on Form 10-K of the Company for the fiscal year ended August
31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments concerning the pending
litigation described in Part II of the Company's Quarterly Report on Form 10-Q
for the quarter ended February 29, 2000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER EXHIBIT
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, Registration No.
000-22123, as filed with the Commission on February 7, 1997).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Three Months Ended May 31,
2000 (filed herewith).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter for which this report is filed.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: JUNE 30, 2000
HORIZON HEALTH CORPORATION
BY: /s/ RONALD C. DRABIK
--------------------------------------------------------------
RONALD C. DRABIK
SENIOR VICE PRESIDENT-FINANCE AND ADMINISTRATION AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, Registration No.
000-22123, as filed with the Commission on February 7, 1997).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule for the Three Months Ended May 31,
2000 (filed herewith).
</TABLE>
